LatAm Steel: Buy Gerdau, Sell CSN, Says UBS

By Shuli Ren

Reuters

UBS is bearish on their iron ore outlook.

Based on that thesis, in a series of initiation reports on Latin American steel companies, the broker recommends buying Gerdau (GGB) as a beneficiary of lower iron ore price, and selling Companhia Siderurgica Nacional (SID), or CSN, since mining is its largest earning generator.

Here are analysts Andreas Bokkenheuser and Rafael Cintra on Gerdau:

As Gerdau is still a net beneficiary of lower iron ore prices (and thus likely to benefit from a near-term price correction), we are encouraged about the near-term potential for margin expansion, as well as management’s target to grow iron ore production 50% by 2016.

Management has budgeted R$8.5-9bn to expand steel and iron ore capacity over the next five years throughout its global operations. Given management’s relatively strong project track record, coupled with ongoing investments in cost-saving energy projects, Gerdau is our top pick in view of attractive earnings growth.

We are initiating coverage of Gerdau with a Buy rating and a DCF-derived price target of R$21.50, representing 20% upside potential to the current share price. Gerdau is trading at 2014-15E PE multiples of 16.9x and 13.1x and 2014-15E EV/EBITDA multiples of 8.0x and 7.1x, respectively.

On CSN:

given our bearish iron ore outlook and the fact that mining is CSN’s largest earning generator, we are cautious in the near term. More specifically, given CSN’s relatively high operating leverage and gearing levels, we believe earnings are set for a correction heading into 2014. Over the longer term, we highlight the risk of a de-rating towards conglomerate PE levels of 8-14x from 16-20x currently.

We are initiating coverage of CSN with a Sell rating and a DCF-derived price target of R$8.50 representing 26% downside potential to the current share price. CSN is trading at 2014-15E PE and EV/EBITDA multiples of 21.7x and 23.6x as well as 7.6x and 8.0x, respectively.

Both stocks have ADR’s in the US.

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